FINSUM

A lot of brokers have been feeling good about the SEC’s best interest rule. While that may be misguided, the perception is that the rule is significantly less stringent than the DOL rule, and thus offers a better operating paradigm. However, developments with the rule are not looking favorable to those hoping for a loose regulatory structure. In House hearings recently, four out of five witnesses called to testify on the rule said that having no new rule would be better than having the BI proposal implemented. One top compliance firm thinks the SEC is moving towards a much more strict DOL-type rule, saying “We predict that the SEC is going to re-propose [Regulation Best Interest] to make it closer to a fiduciary standard because the states have come out [with their own initiatives]”.

FINSUM: We have said for some time that we do not believe the SEC rule will be implemented in anything near its current form. That is reality is looking ever more likely.

Bonds and stocks are sending different signals right now, and it is hard to tell which side is correct. Bonds are reflecting an increasingly bearish outlook on the economy, with yields falling. Stocks, on the other hand, have been jubilant so far this year. The reality is that both sides cannot be correct. Historically speaking, bonds have usually been more astute is measuring the direction of the economy and markets, and if that is the case, then we would be headed for a downturn.

FINSUM: The Fed really weighed in with its view yesterday and they are clearly worried about the direction of the economy. Are bond investors right again?

In our ongoing coverage of the best funds and products we met at the Inside ETFs conference (and in our regular course of business), we today want to highlight Exponential Funds’ American Customer Satisfaction ETF (ACSI). We met with the founding team of the issuer and the fund last month and were impressed with both their concept and implementation. The fund itself takes a different tack in choosing quality companies with good outlooks—instead of focusing solely on financial performance as most other funds do, it looks to extensive customer satisfaction surveys, and chooses the companies which are scoring most highly with consumers. It uses the American Customer Satisfaction Index, which was founded in 1994 at the University of Michigan, as the basis for its models. Customer satisfaction is a widely recognized metric and is ultimately a statement of economic value, so companies that score highly in the area are serving their customers well and are likely to thrive. The fund has an expense ratio of 0.66%.

FINSUM: We really like the angle this fund has developed as it takes a totally different view than mainstream ways of judging company outlooks. We see this as a long-term play that could have significant rewards.

Right now might not seem like the most important time to buy rate-hedged or short duration funds. The Fed is supposed to be on “pause” after all. However, in our view, now might be a critical time to have some rate hedged assets in the portfolio. The reason why is that yields have pulled back strongly from just a couple of months ago, including yesterday, but given the fact that it is almost purely the Fed which has caused the sharp reversal, rates could swing just as wildly higher if their comments, or economic data, changes. In other words, the bond market looks overbought right now because of Fed comments, but it could easily snap back to where it was in December in violent fashion.

FINSUM: We think this is a time for caution on rates and yields given how strongly the market has reversed over the last couple of months.

The high end of the real estate market is faltering, and banks are feeling it acutely. So-called jumbo mortgages, or those outside of Fannie and Freddie backing, have been shrinking recently. In a sign of caution from rich home buyers, issuance of jumbo mortgages fell 12% last year and were off 27% from their post-Crisis peak a couple of years ago. That compares to just a 7% decline in normal mortgages last year. Jumbo mortgages dominate some cities. For instance, 61% of mortgages in Manhattan qualify as such. Banks are feeling the sting as jumbo mortgages have been a big profit center for them in recent years.

FINSUM: The housing market is slowing in all areas. The big question is whether this is a leading indicator of a recession, or just an isolated asset-level downturn.